Are Gold ETFs Due for a Correction?

Gold prices have been on a downhill ride in recent weeks after hitting an all-time high and witnessing nine successive weeks of gain. Overvaluation concerns and a recent spike in the U.S. dollar weighed on gold prices. The spread of coronavirus and the resultant risk-off sentiments as well as low inflation-adjusted interest rates have favored gold prices in recent trading.

But an improvement in the virus outlook, higher chances of vaccines from a number of companies, stronger-than-expected U.S. housing data and the Fed’s reluctance on the yield curve control scheme have boosted the greenback in recent trading.Invesco DB US Dollar Index Bullish Fund (UUP) added 0.4% in the past week. SPDR Gold Shares GLD lost about 2.4% past week (as of Aug 21, 2020).

Inside the Greenback’s Strength

The Fed committee members expressed skepticism last week over using bond purchases to control the government bond yield curve, per CNBC. As a result, post meeting, the benchmark 10-year U.S. treasury yield gained by one bps to 0.68% on Aug 19 from a day earlier. The yield on two-year treasuries was steady at 0.14%. Overall, the yield curve slightly steepened on Aug 19.

Moderately Upbeat Economic Datapoints

Consumer confidence looks to be on the mend. The University of Michigan's consumer sentiment for the United States was at 72.8 in August 2020, down from the previous month's 72.5 and compared to market expectations of 72.0.

Homebuilder confidence in the newly built, single-family home market also jumped to a record-high 78 in August. According to the U.S. Housing and Urban Development and Commerce Department, total housing starts rose 22.6% (the biggest gain since October 2016) to a seasonally adjusted annual rate of 1.50 million units in July. The reading surpassed analysts’ expectations of 1.24 million units, per a Reuters’ poll.

U.S. business activity has touched the highest level since early 2019 this month as companies in both the manufacturing and services sectors witnessed resurgence in new orders despite the high numbers of new COVID-19 cases. If the trend continues, the greenback will remain steady and gold will remain sluggish.

Treatment & Vaccine Hopes

The U.S. Food and Drug Administration (FDA) issued an emergency use authorization for investigational convalescent plasma to treat Covid-19 in hospitalized patients. While the treatment is yet to face full clinical trials, the FDA feels that the“product may be effective in treating Covid-19 and that the known and potential benefits of the product outweigh the known and potential risks of the product.”

In the vaccine race, Moderna, AstraZenaca, Johnson & Johnson and Pfizer, are prominent names. The Financial Times reported that the Trump administration is considering providing "emergency use" approval of the experimental coronavirus vaccine from AstraZeneca and Oxford University in October.

Overvaluation Concerns

Gold may continue to see choppy trading unless there are any new worrying factors cropping up in the market. This is especially true given that the current trading price of the metal is pretty high which is dampening buyers interest in key gold-importing nations like China. So China and Russia are no longer actively building their gold reserves.

What Should Be Your Investing Stance?

Investors who have missed the rally in gold ETFs, wait for a correction to take place. Gold ETF GLD (up 2.7%) underperformed the S&P 500 Index (up 4.6%) past month. But any negative news on the global front will make the yellow metal a star again. Eurozone’s preliminary August PMI readings were weaker than expected. If global growth slowdown continues, gold prices will have chance to bounce back. And if vaccines get rolled out and health risks subside, gold prices are likely to fall.

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SPDR Gold Shares (GLD): ETF Research Reports
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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